The following discussion and analysis of our financial condition and results of operations contains "forward-looking statements". You should read the following discussion of our financial condition and results of operations with "Selected Financial Data" and our consolidated financial statements and related notes thereto. We have based our forward-looking statements about our markets and demand for our products and future results on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in "Cautionary Statements Concerning Forward-Looking Statements" and Item 1A. Business Overview
Spartech is an intermediary processor of engineered thermoplastics which converts base polymers or resins purchased from commodity suppliers into extruded plastic sheet and rollstock, thermoformed packaging, specialty film laminates, acrylic products, specialty plastic alloys, color concentrates and blended resin compounds, and injection molded and profile extruded products for customers in a wide range of markets. We have facilities located throughout the United States, Canada, Mexico and Europe that are organized into three segments and one group as follows:

                                                       % of
                                                    2008 Sales
                   Custom Sheet and Rollstock             45
                   Packaging Technologies                 20
                   Color and Specialty Compounds          30
                   Engineered Products                     5


   We assess net sales changes using three major drivers: underlying volume, the

demand will remain weak through this period. We believe our aggressive cost reduction actions and financial discipline will enable us to effectively manage through the challenging economy. We expect to emerge from this environment a stronger and better positioned Company to support future long-term profitable growth.
Results of Operations
Comparison of 2008 and 2007
Consolidated Summary
Net sales were $1,398.9 million and $1,452.0 million in 2008 and 2007, respectively, representing a 4% decrease in 2008. The decrease was caused by:

                       Underlying volume              (13 )%
                       Prior year additional week      (2 )
                       Creative acquisition             3
                       Price/Mix                        8

                                                       (4 )%

Our underlying volume decreased 191 million pounds, or 13%, because of lower end market demand and decreases in discretionary spending in the economy. Of the 191 million pounds decrease, 61% occurred in the transportation and recreation and leisure markets. Our volume sold to the transportation market declined 25% from the prior year due mostly to lower volumes to the automotive sector. Volume sold to the recreation and leisure market was lower by 20%, reflecting decreases in sales to recreational vehicles, pools, spas and marine sectors of this market. Most of the remaining 39% of our underlying volume decrease occurred in the packaging market which declined 10% from the prior year and our building and construction market which was lower by 6% from the prior year. The decrease in the packaging market was caused by lower purchases in the industrial and food packaging sectors of this market, and the decrease in the building and construction market reflected lower sales to the residential sector which were partially offset by an increase in volume sold to the commercial sector of this market.
The decrease in volume from the additional week reflects 53 weeks of sales activity in 2007 compared to 52 weeks in 2008. The increase from the Creative acquisition represents the full-year impact of sales dollars from this acquisition which occurred in September 2007. Our sales comparison benefited from price/mix due mostly to increases in sales dollars from the pass-through of resin cost increases.
The following table presents net sales, components of cost of sales, and the resulting gross margin in dollars and on a per pound sold basis for 2008 and 2007. Cost of sales presented in the consolidated statements of operations includes material and conversion costs and excludes amortization of intangible assets. The material and conversion cost components of cost of sales are presented in the following table. We have not presented these components as a percentage of net sales because a comparison of this measure is distorted by changes in resin costs that are typically passed through to customers as changes to selling prices. These changes can materially affect the percentages but do not present complete performance measures of the business.

                                                   2008          2007
              Dollars and Pounds (in millions)
              Net sales                          $ 1,398.9     $ 1,452.0
              Material costs                         948.2         952.1

              Material margin                        450.7         499.9
              Conversion costs                       324.8         336.3

              Gross margin                       $   125.9     $   163.6


              Pounds Sold                            1,236         1,436


              Dollars per Pound Sold
              Net sales                          $   1.132     $   1.011
              Material costs                         0.767         0.663

              Material margin                        0.365         0.348
              Conversion costs                       0.263         0.234

              Gross margin                       $   0.102     $   0.114

The increases in net sales and material costs per pound in 2008 were caused by significant increases in our resin costs during the year which we passed along to customers as higher selling prices. The 1.7 cent per pound increase in material margin reflects sales mix changes and the positive impact of our margin enhancement initiative. Our conversion costs per pound increased 2.9 cents because of the decrease in sales volume. Excluding the Creative acquisition, our conversion cost dollars decreased 7% due to the volume decline and the impact of our manufacturing cost optimization initiative on reducing our labor-related costs. Labor-related costs represent approximately half of our total conversion costs, and this initiative resulted in approximately $15 million of lower labor costs in 2008. We expect another $10 million of lower labor costs in 2009 compared to 2008 due to the full year impact of our initiative.
Selling, general and administrative expenses were $92.6 million in 2008, representing an $8.7 million increase over the prior year. The increase was caused by the full-year impact of our Creative acquisition, higher information technology expenses to support our company-wide Oracle information system implementation, higher professional fees to support our turnaround initiatives and higher bad debts expense, the impacts of which were partially offset by the extra week and a charge associated with the resignation of the Company's former President and Chief Executive Officer, both of which occurred in 2007.
Amortization of intangibles was $5.2 million in 2008 compared to $4.5 million in 2007. The increase was due to the prior year Creative acquisition. We estimate a decrease to $4.5 million of amortization in 2009, which reflects the impact of our current year asset impairments and certain assets that became fully amortized in 2008.
The $238.6 million of goodwill impairments and $15.5 million of fixed asset and other intangible asset impairments in 2008 reflect non-cash charges which were incurred in our Custom Sheet and Rollstock, Color and Specialty Compounds and Engineered Products business segments and group. Additional details regarding these impairment charges are discussed in Notes 4 and 5 to the consolidated financial statements.
Restructuring and exit costs were $2.3 million in 2008 and $1.3 million in 2007. The 2008 costs are mostly comprised of employee severance, equipment moving expenses and accelerated depreciation resulting from the Company's manufacturing cost optimization initiative. For announced restructuring initiatives as of November 1, 2008, the Company expects to incur approximately $1.8 million of additional restructuring costs, primarily cash-related equipment moving and installation expenses. The 2007 costs primarily represent employee severance, equipment moving expenses and accelerated depreciation associated with the shut-down of three former sheet production facilities and the movement of the business into the Company's newly constructed facility in Greenville, Ohio.
The Company reported a $228.3 million operating loss in 2008 which compared to $72.4 million of operating income in 2007. The $300.8 million decrease reflected the $238.6 million goodwill impairment in 2008, the $14.0 million increase in fixed asset and other intangible asset impairments and $1.1 million increase in restructuring and exit costs. The remaining $47.1 million decrease was caused by the decline in sales volume which was mitigated somewhat by higher material margins and reductions in conversion costs.
Interest expense, net was $20.6 million in 2008 and $17.6 million in 2007. The higher expense in 2008 was due to the increase in debt to fund the Creative acquisition and stock repurchases during the fourth quarter of 2007 and the first quarter of 2008.
Our effective tax rate in 2008 was impacted by the significant goodwill impairments, some of which were not tax deductible. Excluding the goodwill impairments, our effective tax rate was 32% in 2008 which compared to 38% in 2007. Our 2008 effective tax rate was positively impacted by domestic state and foreign tax law changes in the first quarter of 2008. We estimate our 2009 tax rate to be in the approximate range of 38% to 39%.
We reported a net loss of $192.1 million in 2008 and net earnings of $33.8 million in 2007. These amounts reflect the impact of the items previously discussed.

Custom Sheet and Rollstock Segment
   Net sales were $637.1 million and $674.8 million in 2008 and 2007,
respectively, representing a 6% decrease in 2008. This decrease was caused by:

                       Underlying volume              (12 )%
                       Prior year additional week      (2 )
                       Price/Mix                        8

                                                       (6 )%

Most of our underlying volume decrease in this segment occurred in the transportation, recreation and leisure and building and construction markets. Volume sold to the transportation market decreased 22% and occurred within the automotive and heavy truck sectors of this market. The segment's volume to the recreation and leisure market was lower by 22% reflecting lower sales of recreational vehicles, spas, pools and marine products. We experienced an 18% decline in volume to the building and construction market from decreases in sales of residential construction-related products. The price/mix benefit was mostly from sales dollar increases from the pass-through of resin cost increases.
This segment reported an operating loss of $100.1 million in 2008 and operating income of $44.2 million in 2007. This comparison reflects $119.2 million of asset impairments in 2008. The remaining $25.1 million decrease in operating earnings was caused by the lower volume and lower material margins in the early portion of 2008 because of a significant increase in resin costs that were not passed along to customers in a timely manner. These adverse factors were partially offset by lower costs from our manufacturing cost optimization initiative and higher margins from our margin enhancement initiative in the later portion of 2008. Packaging Technologies Segment
Net sales were $274.4 million and $253.7 million in 2008 and 2007, respectively, representing an 8% increase in 2008. This increase was caused by:

                        Underlying volume              (8 )%
                        Prior year additional week     (2 )
                        Creative acquisition           13
                        Price/Mix                       5

                                                        8 %

The decrease in underlying volume reflected a 7% decline to packaging-related markets, which represent approximately three-fourths of this segment's total sales, and a 13% decline in the remaining portion of this segment sold to non-packaging related markets. Our Creative acquisition provided additional sales of $34.1 million in 2008 versus 2007. The price/mix benefit was mostly from sales dollar increases from the pass-through of resin cost increases.
Operating earnings were $18.8 million in 2008 compared to $26.1 million in 2007. This decrease was caused by the decline in volume and lower underlying material margins from significant increases in resin costs in 2008 that were not passed along to customers in a timely manner due largely to indexed pricing arrangements. These factors were partially offset by additional earnings contributed from Creative and benefits from our manufacturing cost optimization initiative.
Color and Specialty Compounds Segment
Net sales were $414.0 million and $446.8 million in 2008 and 2007, respectively, representing a 7% decrease in 2008. This decrease was caused by:

                       Underlying volume              (16 )%
                       Prior year additional week      (2 )
                       Price/Mix                       11

                                                       (7 )%

Approximately three-fourths of the sales volume decline in this segment occurred from lower sales of compounds to the automotive market and industrial packaging market. These sectors of our end markets represented about half of this segment's sales volume and were lower by 27% and 23% for automotive and industrial packaging, respectively, from 2007. These losses were somewhat mitigated by an increase in volumes sold to the commercial construction market. The price/mix benefit was mostly from sales dollar increases from the pass-through of resin cost increases.

This segment reported an operating loss of $98.0 million in 2008 and operating income of $23.1 million in 2007. This comparison reflects $112.7 million of asset impairments in 2008. The remaining $8.4 million decrease in operating earnings was caused by the lower volume which was offset somewhat by higher material margins from improved mix and our margin enhancement initiative and lower costs from our manufacturing cost optimization initiative. Engineered Products Group
Net sales were $73.4 million and $76.7 million in 2008 and 2007, respectively, representing a 4% sales decrease in 2008. This decrease was caused by:

                        Underlying volume              (5 )%
                        Prior year additional week     (2 )
                        Price/Mix                       3

                                                       (4 )%

The underlying volume decline in this group was primarily caused by lower sales of lawn mower wheels due to decreases in discretionary spending in the economy. The price/mix benefit mostly resulted from sales dollar increases from the pass-through of resin cost increases.
This group reported a $13.3 million operating loss in 2008 versus $9.6 million of operating income in 2007. Of the $22.9 million decrease, $21.6 million was caused by 2008 asset impairments. The remaining $1.3 million resulted from the lower volume of lawn mower wheels sold. Corporate
Corporate expenses are reported as selling, general and administrative expenses in the consolidated statements of operations and include corporate office expenses, information technology costs, professional fees and the impact of foreign currency exchange. Corporate expenses were $35.8 million in 2008 compared to $30.6 million in the prior year. Corporate expenses increased in 2008 from higher depreciation expense, information technology related costs associated with our company-wide Oracle information system implementation and higher professional fees to support our turnaround initiatives. Comparison of 2007 and 2006
Consolidated Summary
Net sales were $1,452.0 million and $1,485.6 million for the years ended 2007 and 2006, respectively, representing a 2% decrease in 2007. The causes of this percentage decrease were as follows:

                       Underlying volume               (4 )%
                       Volume from additional week      2
                       Acquisition of business          -
                       Price/Mix                        -

                                                       (2 )%

The decrease in underlying volume was caused by lower sales of compounds to the automotive sector of the transportation market, color concentrates to the packaging market and lower sales of sheet to the recreation and leisure market, the residential sector of the building and construction market and the heavy truck and automotive sectors of the transportation market. These declines were partially offset by increases in sales of thermoformed product to the packaging market, sheet to the refrigeration sector of the appliance and electronics market and compounds to the commercial building and construction market. Disruptions from the Greenville sheet consolidation also contributed to the decline in sales volume during 2007. Sales volume from the additional week reflects 53 weeks of sales activity in 2007 compared to 52 weeks in 2006. The price/mix impact was flat, reflecting a benefit from an increase in sales mix of thermoformed product offset by the impact from lower average resin costs in 2007 versus 2006 which were passed through to customers as lower selling prices.
The following table presents sales, components of cost of sales, and the resulting gross margin in dollars and on a per pound sold basis for 2007 and 2006. Cost of sales presented in the consolidated statements of operations includes material and conversion costs and excludes amortization of intangible assets. The material and conversion cost components of cost of sales are presented in the following table. We have not presented these components as a percentage of net sales because a comparison of this measure is distorted by changes in resin costs that are typically passed through to customers as changes to

selling prices. These changes can materially affect the percentages but do not present complete performance measures of the business.

                                                   2007          2006
              Dollars and Pounds (in millions)
              Net sales                          $ 1,452.0     $ 1,485.6
              Material costs                         952.1         968.3

              Material margin                        499.9         517.3
              Conversion costs                       336.3         340.8

              Gross margin                       $   163.6     $   176.5


              Pounds Sold                            1,436         1,460


              Dollars per Pound Sold
              Net sales                          $   1.011     $   1.017
              Material costs                         0.663         0.663

              Material margin                        0.348         0.354
              Conversion costs                       0.234         0.233

              Gross margin                       $   0.114     $   0.121

Material margin and gross margin per pound sold decreased primarily because of higher resin costs in the second half of 2007 which we were not able to fully pass on to customers as higher selling prices due to a soft demand environment. Conversion costs per pound sold during 2007 increased slightly from 2006 due to an increase in per pound labor-related expenses and higher depreciation expense partially offset by a shift in mix of sales to lower cost plants and reductions in freight, repairs and maintenance and packaging expenses per pound sold.
Selling, general and administrative expenses were $83.8 million in 2007, representing an $8.5 million increase over 2006. The 2007 expenses include a $1.9 million charge associated with the resignation of the Company's former President and Chief Executive Officer in the third quarter of 2007, a $2.8 million foreign currency net loss due to a weaker U.S. dollar during 2007 and $0.4 million of selling, general and administrative expenses reported in our Creative business. In our fourth quarter of 2007, we restructured our U.S. dollar investment previously held by our Canadian operations which will mitigate the majority of our consolidated foreign currency exposure that caused the net currency losses in 2007. Excluding these factors, selling, general and administrative expenses increased $3.6 million in 2007 due primarily to a $2.5 million increase in information technology-related costs, including depreciation expense, associated with our company-wide Oracle information system implementation, higher professional fees and the impact from the inclusion of an additional week during 2007, all of which were partially offset by lower incentive compensation expenses.
In the first quarter of 2006, we adopted SFAS 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"). Prior to the adoption of SFAS 123(R), we had adopted the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation, and no expense related to stock options was recognized in our results of operations. We implemented SFAS 123(R) using the modified prospective transition method, which requires the expensing of stock options upon adoption without restating prior periods. Stock-based compensation was $2.9 million in 2007, of which $2.6 million was recognized in selling, general and administrative expenses and $0.3 million was recorded as cost of sales. In 2006, stock-based compensation expense was $2.8 million, of which $2.5 million was recognized in selling, general and administrative expenses and $0.3 million was recorded as cost of sales.
In October of 2007, Pfizer, Inc. ("Pfizer"), a customer of Creative, announced the exit of its new inhaled insulin product, Exubera, which resulted in the impairment of a customer-related intangible asset assigned to the Pfizer relationship upon acquisition.
In the fourth quarter of 2006, we recorded a $3.2 million non-cash goodwill impairment charge due to changes in our profiles business and the reorganization of the operations, management and reporting of this business which led to a redefinition of our operating segments comprising our Engineered Products group and allocation of goodwill to our new profiles reporting unit. The fair value of our profiles business did not support the $3.2 million goodwill allocation which resulted in the impairment charge.

Restructuring and exit costs were $1.3 million during 2007 and $1.9 million in 2006 and largely represent employee severance, equipment moving and accelerated depreciation charges. The 2007 restructuring and exit costs primarily reflect the expenses associated with the consolidation of three existing Custom Sheet and Rollstock production facilities into one newly constructed facility in Greenville, Ohio. The 2006 restructuring and exit costs primarily represent the expenses associated with the consolidation of three Color and Specialty Compounds production facilities into one plant in Donora, Pennsylvania.
Operating earnings for 2007 were $72.4 million compared to $91.4 million in 2006, representing a $19.0 million decrease. The decrease in operating earnings is largely attributable to the $13.0 million decrease in gross margin and the $8.5 million increase in selling, general, and administrative expenses, . . .